Can pay.. won't pay!

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2 October 2008

Much of the world’s wealth now hangs out in tax havens, as *John Christensen* knows from first-hand experience. The consequences have been disastrous. But the winds of financial crisis might finally be about to blow the havens away.

Illustration by *Kate Charlesworth*

It was a hot, windless afternoon in August 1995 and the atmosphere in my office in Saint Helier, Jersey, was stifling. I was economic adviser to this Channel Island tax haven, one of many offshore satellites of the City of London, and I was sitting opposite a multi-millionaire and his wife and their six financial and legal advisers. I asked him why he had not paid a penny of income tax in five years. His defence was this: my millionaire friends pay no tax and my financial advisers told me I do not need to pay tax – so why should I?

His defence could almost be a manifesto for the world’s wealthy: ‘We’re rich, we’re different – and taxes are for the little people.’

The millionaire’s team were stunned by my pugnacious attitude: this was not the Jersey way. I asked him: ‘Which of your advisers said you need not pay tax?’ I saw a banker flinch, and hold his hands up to his face. It was him.

Later, out of curiosity, I checked his claim about Jersey’s super-wealthy – and he was largely right. Many, I found, paid astonishingly little tax or, in more than half the cases I examined, nothing at all.

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The world’s super-rich have set themselves apart from the rest of society and have created a vast offshore economy from where they, and powerful corporations, can disengage from regulation and taxes, leaving the rest of us to pay the bills. This was the secret parallel universe I set out to research in the 1980s: living in Jersey gave me the perfect cover.

Mind-boggling

A few figures help illuminate the rot. Since financial market deregulation in the 1970s, the number of tax havens has more than trebled. Over $600 billion – nearly three times today’s external debt – has leaked from sub-Saharan Africa in capital flight since 1975, almost all disappearing into secret bank accounts and offshore companies in places like Jersey, Luxembourg, Switzerland and London.

The scale of this scandal is mind-boggling. Conservative estimates suggest that the world’s wealthiest individuals have parked $11,500 billion offshore – allowing them to dodge over $250 billion dollars each year in tax. That alone far exceeds what the UN asked for in its Millennium project to tackle global poverty.

But that is just part of the picture: tax dodging by corporations is much bigger. The World Bank has reported that cross-border flows of the proceeds from criminal activities, corruption and tax evasion range from $1,000 billion to $1,600 billion per year, with half (or $500 to $800 billion) coming from Majority World economies.

The rich countries currently spend about $100 billion dollars on aid. So for every dollar of aid in, five to eight dollars flow out under the table. The tax evasion component of the global sum is by far the biggest, with commercial tax evasion making up $700 to $1,000 billion of the global figure. Historically there has not been such a large gap between rich and poor – ever.

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Why has the tax haven racket been allowed to flourish this long? Havens lie at the heart of global financial markets – with over $2,000 billion flowing daily through their circuits. Yet their role in undermining regulation and destroying the integrity of national tax systems is poorly understood. Efforts to tackle the problem have been pitiful and fiercely resisted.

Lawyers, accountants and bankers working for the super-rich have helped develop new legal and financial structures and have strong-armed governments into setting up lax regulatory and tax frameworks. Meanwhile major nations, notably Britain and the United States, have actively hindered reform, while civil society has mostly shied away from the issue because of its complexity.

London has become the largest offshore financial centre. In the 1950s, during decolonization, Britain was trailing on competitiveness and investment and the City was stagnant. Decolonization allowed Britain to create a network of quasi-autonomous states to funnel capital flows towards London. Almost half the world’s tax havens, including the Cayman Islands, the Channel Islands, the British Virgin Islands and Bermuda, have close political ties to Britain, and they host some of the most substantial offshore financial centres, largely staffed by expatriate specialists originating from the City. But Britain denies it is a tax haven.

By encouraging its overseas territories and Crown dependencies to become tax havens, the British Government set in motion a global financial octopus with the City as its head, heart and mouth, and the satellite tax havens as its tentacles, scooping up vast sums of money from around the world and feeding it into London.

Britain is not the only culprit, of course: we all know about Swiss banking secrecy, for example, or the criminal monies stashed in Liechtenstein. Singapore is energetically attracting dirty money from Asia and Europe. The US has tax haven characteristics, which allow wealthy people, especially from Latin America, to disguise their identity when they invest in US Treasury Bonds. With more countries getting in on the act, a process of ‘tax competition’ between jurisdictions has emerged, as each competes to offer incentives to footloose capital. Secrecy and lax regulation serve as the major lures. In April this year, for example, Jersey set up its first unregulated hedge fund. Others will follow. In the 1990s the OECD tried to address the scandal with its ‘harmful tax competition’ project, but the initiative was neutered by financial lobbies and President George W Bush’s incoming administration.

Powerful companies and super-wealthy people – backed by a pinstripe infrastructure of financial intermediaries – have ruthlessly exploited this race to the bottom. Even the most powerful nations cannot resist the pressures. ‘Cut our taxes,’ company directors demand, ‘or we will move to Ireland, or Switzerland.’ ‘Give us special treatment on capital gains,’ the private equity magnates warn, ‘or we will invest our wealth elsewhere.’ National governments quail before these threats – and concede to the plutocrats. And so the race continues.

The outcome has been disastrous. Lax regulation in tax havens has been a major factor behind the current financial crisis: it is not coincidence that most of the structured investment vehicles and securitized debt obligations behind the banking crisis have been created in places like Jersey and Grand Cayman. Across the world the tax charge has been shifted from those who can afford it, powerful companies and rich people, on to workers and consumers; the inevitable outcome has been less job creation, greater inequality and rising poverty rates.

This is especially a curse on poor countries, but not only on them: former US Treasury Secretary Larry Summers recently noted that if the income distribution in the US were the same today as in 1979, the poorest 80 per cent of Americans would have about $670 billion more – or about $8,000 per family – while the top one per cent would have about $670 billion less, or about $500,000 per family.

The economics profession and the aid industry, among others, have largely ignored this vast offshore economy. Most orthodox economists don’t even identify the offshore economy as a political or economic phenomenon, let alone ask why over half of world trade passes on paper through tax havens. The World Bank and the IMF have failed to incorporate into their analyses how tax havens destabilize financial markets by allowing risks to be disguised in complex offshore structures, or to explore systematically their role in driving inequality and poverty. They have ignored how tax havens encourage criminality by offering secrecy to fraudsters, tax cheats and embezzlers: providing the supply-side of the grand corruption that has decimated so many countries.

Mood shift

For half a century the cancer of tax havens has metastasized through the global economy, causing turmoil, increasing inequality and insecurity, and undermining democracy and national sovereignty. Removing this cancerous growth must now, urgently, be made a global priority.

Thankfully, we detect signs of a global mood shift. US presidential candidate Barack Obama’s proposed Stop Tax Haven Abuse Act suggests many Americans have had enough. Emerging scandals in places like Liechtenstein have hardened attitudes, and the financial crisis has abruptly ended the free-for-all financial deregulation that puffed so much air into the offshore phenomenon. The Tax Justice Network is sounding the alarm, and non-governmental groups are waking up and joining the protests. An epic struggle is now set to emerge, between the super-rich offshore operators and the rest of us.

Returning home to Jersey, I find that dark clouds are gathering. Young islanders cannot afford the high cost of living, and are leaving to find jobs elsewhere. Poverty rates are astonishing for an economy with almost the highest GDP per capita in the world. Jersey’s economy now depends almost entirely on its tax haven status, and measures to tackle tax havens will cause major disruption. Jersey people, now learning more about their island’s role in impoverishing the world, increasingly feel ashamed.

John Christensen is a development economist who went undercover in Jersey’s banking sector to discover how tax havens operate. He also worked as the island’s economic adviser from 1987 to 1998. Since leaving Jersey in 1998, he has helped launch the Tax Justice Network and directs its International Secretariat in London. www.taxjustice.net

TOP DODGERS!

*Leona Helmsley* - Queen of mean

Already a successful ‘condominium broker’ in New York, Leona married real-estate magnate Harry Helmsley and thereby became the owner of a chain of hotels and the Empire State Building. In 1988 Harry and Leona were indicted by US Attorney Rudy Giuliani (later Mayor of New York) on tax charges related to the refurbishment of a luxurious weekend retreat. Harry’s health had deteriorated so much during his marriage to Leona that he escaped the courtroom – but died shortly afterwards. Leona did not. During the trial Elizabeth Baum, a former housekeeper, testified that she had once commented to Leona that she ‘must pay a lot of taxes’. ‘We don’t pay taxes,’ Leona had replied. ‘Only the little people pay taxes.’ Leona became known as ‘The Queen of Mean’. She was sentenced to 16 years, though she served just 18 months in a federal jail. She died in 2007. Her $4 billion estate left $12 million to her Maltese dog, Trouble.

TOP DODGERS!

*The Prince of Liechtenstein* - High haven

Though Hans-Adam II has delegated many of his sweeping powers to his son Alois, he remains the titular head of an Alpine principality of just 35,000 souls but 75,000 registered companies. Liechtenstein is the world’s largest manufacturer of false teeth – and its most secretive banking location. At its heart is the LGT banking group, now controlled by Prince Alois but still making Hans-Adam II one of the world’s richest heads of state. As a haven for Nazi gold during World War Two, Liechtenstein refused to hand over any money until a whistleblower proved that millions were being held there. Now another whistleblower, indicted property fraudster and ex-LGT employee Heinrich Kieber, has spilled the beans. The tax authorities of Britain, Germany and the US have reportedly paid Kieber large sums for access to a computer disk he smuggled out of LGT that lists its account holders. So far, the head of the German post office has been charged in Germany with stashing a mere $20 million in Liechtenstein. More revelations should follow, though Hans-Adam II himself will doubtless remain immune.

This article is from
the October 2008 issue
of New Internationalist.
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